In December 2023, the High Court handed down judgment in the case of The Burke Partnership (a firm) v The Body Shop International Ltd [2023] EWHC 2897 (Ch) which concerned the termination of two long-standing franchise agreements.

Those agreements were between the franchisee and claimant, The Burke Partnership (TBP), and the franchisor and defendant, The Body Shop. The first franchise agreement was entered into in 1981 and entitled TBP to operate one The Body Shop store in Norwich, while the second franchise agreement was entered into in 1982 on substantially similar terms and entitled TBP to operate two stores in Cambridge.

The duration of both agreements was stated to be five years, following which TBP had a right to extend the term of the agreements “on the same terms and conditions as are herein provided including the provisions of this Clause for a further period of Five Years from the expiration of the term of this Agreement”. This extension right was conditional on TBP having served notice in accordance with the terms of the agreements and “complied with its obligations hereunder in all respects”. Crucially, the agreements did not include either a right for The Body Shop to terminate the agreements for convenience or a cap on the number of times that TBP could exercise its extension right.

The agreements were extended for additional periods of five years on multiple occasions after the initial five year term had expired. That was until 2021, when notice given by TBP to extend both agreements for a further period of five years was rejected by The Body Shop. As there was no contractual right for The Body Shop to block the extension (given TBP had met the conditions for the extension) or terminate the agreements (either for convenience or for TBP’s breach (as it was accepted that TBP had not breached the agreements)), The Body Shop attempted to argue that the term of the agreements was indefinite and, therefore, that an implied right to terminate the agreements on reasonable notice was necessary for “business efficacy”. Accordingly, The Body Shop attempted to terminate the agreements on three years’ notice (which it deemed to be a reasonable period of notice).

TBP argued that such a termination right could not be implied into the agreements and commenced proceedings against The Body Shop. The court found in favour of TBP, rejecting The Body Shop’s case that “a term should be implied into the Agreements that upon the expiry of a reasonable time they are terminable by TBSI [The Body Shop] on reasonable notice” on the basis that:

1. The term of the agreements was not perpetual: rather, the term of the agreements was five years which could be extended by TBP, provided that TBP satisfied certain conditions.
2. The relevant principles for implying a term into a contract are summarised in the judgment as follows:

“[a] term will not be implied unless, on an objective assessment of the terms of the contract, it is necessary to give business efficacy to the contract and/or on the basis of the obviousness test … The business efficacy and the obviousness tests are alternative tests.”

Based on these principles, the court found that the agreements “do not lack commercial or practical coherence in the absence of the desired term [i.e. a right for The Body Shop to terminate on reasonable notice] which is not necessary in order to give [the agreements] business efficacy” and that “the term sought is not so obvious that it goes without saying”.

It is unclear whether The Body Shop will seek to appeal this decision. However, it provides a word of warning to Franchisors seeking to exit long-term franchise agreements where they have no express right to do so. 

Franchisors should therefore carefully plan their exit strategies from the outset and should consider the following:

• when (and at what frequency) such extension rights should come into effect;
• whether the Franchisee’s extension right should be unilateral (subject to satisfying certain pre-conditions) or whether it should be subject to the Franchisor’s approval;
• if the Franchisee’s extension right is unilateral, what pre-conditions should the Franchisee be required to satisfy in order to extend the agreement and should these conditions vary for each subsequent extension period; 
• if the agreement should be extended on the same terms or whether the agreement requires re-negotiation at the point of its extension (perhaps with agreement to revised terms being one of the conditions to the extension); 
• whether the right to extend should limited by setting a maximum aggregate term for the agreement which can’t be further extended without the Franchisor’s prior consent; and/or
• whether the Franchisor should have an express right to terminate for convenience, exercisable after the expiry of a specified minimum period.

Even though the Franchisee in this case had satisfied the agreed pre-conditions in order to exercise its extension right, Franchisees should (as a matter of good practice) carefully consider any such pre-conditions (including any specific notice requirements) and should ensure that they have satisfied (and will continue to be able to satisfy) these conditions as they approach the date for exercise of an extension right. Where extension is conditional upon the Franchisee’s compliance with the agreement, Franchisees should seek to ensure that their extension right is only at risk by reference to non-compliance which is both (a) material; and (b) ongoing at the date that notice exercising the right to extend is given. Franchisees should seek to ensure that they have fully addressed any issues concerning contractual compliance before the extension right is exercised.